* Spanish yields fall, Fed outlook underpins riskier assets
* Bunds hit new 2-month high in thin volumes
* Italian debt stable as market absorbs supply
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Oct 28 Spanish yields fell on Monday as
expectations the U.S. Federal Reserve will keep its monetary
stimulus at current levels at a policy meeting this week
supported demand for riskier assets.
Spanish bonds outpaced Italian paper, which was hobbled by
the prospect of up to 9 billion euros of debt sales this week.
Spain clawed back ground lost last week after below-forecast
German sentiment and euro zone business sector surveys raised
concern about the bloc's recovery.
Last week's modest rise in yields lured back investors
encouraged by the prospect that the Fed will not begin trimming
its bond purchases until early next year to lessen the economic
impact of a two-week government shutdown, analysts said.
"Investors seem to be scaling back into peripherals because
the market is confident that the Fed will remain with its foot
on the stimulus pedal," said Felix Herrmann, market strategist
at DZ Bank in Frankfurt.
Spanish 10-year yields fell 6 basis points to
4.09 percent. Bank of Spain forecasts that the country escaped a
two-year recession in the third quarter thanks to strong exports
were also supporting the bonds, traders said.
"The recovery is finding some footing there and it is
expected to continue next year. This is also a positive driver
for Spanish bonds," Commerzbank rate strategist David Schnautz
Equivalent Italian yields edged lower to 4.19 percent
as the market absorbed a sale of 3 billion euros
of zero-coupon and inflation-linked debt which met healthy
Rome plans to sell on Wednesday a further 6 billion euros of
conventional bonds. Many in the market expect the sale to go
well, supported by 24 billion euros in redemption flows.
Investors largely shrugged off political tensions in Italy,
buoyed by expectations central banks, including the European
Central Bank, would maintain ultra-easy monetary policies.
A looming Senate vote over whether to expel former prime
minister Silvio Berlusconi from parliament and rifts shaking his
centre-right party are exacerbating tensions for the fragile
left-right coalition government.
German Bund futures rose three ticks to 141.09,
having hit a two-month peak of 141.23 earlier in the session.
German 10-year yields were steady at 1.75 percent.
A storm in London has hit trading volumes across financial
markets. Just over 400,000 lots of Bund future contracts
exchanged hands on Monday, compared with a daily average of
above 700,000 in 2013.